Labour's plans to stop the Conservatives pouring millions of pounds into key marginal seats have been dealt a serious blow by the Electoral Commission.

In a leaked document seen by the Guardian, the commission's chief executive, Peter Wardle, reveals it has "strong reservations" about proposals to reform party funding put forward by the justice secretary, Jack Straw.

In June, Straw announced measures designed to put a stop to the tactic of pouring huge sums of money into closely contested seats outside of an election period, the loophole exploited most famously by Tory deputy chairman Lord Ashcroft, who has allocated £2m for 50 Conservative candidates in marginal seats, leaving Labour MPs to complain they have been outgunned. At the 2005 election, the Tory party gained 33 seats, many of them recipients of money from a £1.5m fund that Ashcroft established.

Spending during an election campaign is strictly limited and averages £11,000 depending on the size of the constituency. But there are no rules governing how much money can go into promoting potential candidates in the months and years before the official election period.

The new legislation is intended to restrict spending for a whole parliament, from the moment a candidate is adopted by the party, starts leafletting constituents or gives media interviews. No local candidate would get more than £12,000.

Some examples of the tactics to be banned include putting up advertising hoardings highlighting a new candidate, a tactic used in Eastleigh and Kidderminster by the Tories before the date of the last general election was announced.

Ashcroft has argued that his funding tactic "levels the playing field" because an incumbent MP has a "communications allowance". But in one example, from Harlow in Essex, figures from the watchdog show a massive imbalance as Tory financiers poured £143,000 into the seat, while the local Labour party received only £14,000 from trade unions.

Under the proposals, the commission would have greater power to investigate when rules are broken by parties and candidates. But in the document dated July 17, circulated to leading Tory and Liberal Democrats and leaked to the Guardian, Wardle raises substantial objections to the new proposals.

New spending rules are designed to be triggered when a candidate is announced. But the document makes clear that the commission believes such triggering creates "problems in terms of uncertainty and scope for avoidance".

The Electoral Commission cannot block the legislation, but the new rules would only come into effect once the watchdog issued guidance. Even if the law was passed by next summer, a consultation period would follow, leaving almost no time for the changes to come in ahead of the next election. The delay would leave the way open for Tory funding to continue unchecked.

The document seen by the Guardian warns: "The commission's view is that it would not be able to issue finalised guidance in this area until the relevant primary legislation had received royal assent and the commission had carefully considered the wider context in which guidance would operate, and consulted widely on the content of the guidance.

"The commission also strongly supports the recommendation from the ...review of the 2007 Scottish elections, that no changes to the rules surrounding elections should be applied to an election held within six months of those changes coming into force."

Justin Fisher, political science professor at Brunel University said: "It is a perfectly understandable reaction on the part of the Electoral Commission. They could well end up in a situation where they are called on to address whether a candidate's expenses are political without legal clarity. At which point they know they will face all sorts of challenges."